Investing is good, but think health over wealth

PHOTO: Investing is good, but think health over wealth

SINGAPORE - Central Provident Fund (CPF) savings are used by Singaporeans for various areas such as housing, investment, insurance, health-care expenses and education. The Sunday Times is embarking on a four-part series on CPF to help readers better understand its different aspects and examine how Singaporeans can best use their CPF money.

Today, we begin by looking at how those aged below 35 can use their CPF funds wisely.

Ask Singaporeans what CPF stands for, and expect tongue-in-cheek replies such as Cash Prior to Funeral or Coffin Purchase Fund.

This tendency to occasionally poke fun at this national institution is an irreverent acknowledgement that the fund has been a matter of grave concern to Singaporeans since its inception in 1955.

Jokes aside, of course, it stands for Central Provident Fund (CPF), a social security savings plan whose scope includes retirement, health care, home ownership, family protection and asset enhancement.

"We need to understand that the primary purpose of CPF is for our own retirement and not for housing, health care or investment for short-term goals," said Mr Christopher Tan, chief executive of financial advisory firm Providend.

"As such, we need to be very prudent with what we use our CPF for and how we use it," he added.

The Sunday Times finds out how those aged under 35, such as young working adults or new home owners, can best use their CPF funds.

1. Make health care top priority

As the old adage goes, "health is wealth".

And so financial advisers urge Singaporeans to make taking care of medical expenses the top priority when deploying their CPF arsenal.

Having one's health-care expenses well protected by insurance is akin to constructing a building with a secure foundation.

This will provide a firm foundation which one can build on for his financial well-being, the experts say.

"Investing in a comprehensive, private integrated shield plan using Medisave is likely to be one of your best investments," said Ms Jenny Teo, NTUC Income senior manager and head of business centre.

"This should be the top priority given the rising cost of health care and the fact that any major medical condition can significantly derail your financial plan and cause hardship to your dependants," she added.

Having these plans will prevent unforeseen health-care costs from depleting your savings, say the experts.

Ms Teo urged those aged under 35 to take advantage of their "good health to enjoy coverage without exclusions", as they are less likely to suffer from health issues.

Providend's Mr Tan advised CPF members not to depend on their Medisave to "pay for catastrophic diseases as it will not be enough and may drain their Medisave".

He added: "A better way to use your Medisave money is to buy MediShield or, better still, private shield plans.

"Let the insurance companies pay for your medical expenses and transfer the risk to the insurance company."

2. Do your housing sums

Housing forms a critical component of how Singaporeans use their CPF money, with many tapping their Ordinary Account (OA) funds to pay for their mortgages.

Those below 35 are highly likely to be shopping for their first property, or may have recently bought a home.

These first-time home buyers can use the "Our First Home" calculator on the CPF website to calculate how much they should be committing to a property based on their income, said Mrs Nyang-Ngiam Su Ying, CPF's senior deputy director (housing schemes).

Financial advisers say you should plan your housing budget carefully before choosing your home and not the other way around.

Providend's Mr Tan said: "You should not be using more than 20 per cent to 25 per cent of your family's gross income to service your monthly repayments."

You should also not stretch the loan beyond your planned retirement age, he advised.

NTUC Income's Ms Teo added: "Buy a home you can afford rather than get one in which you need to borrow heavily to finance the purchase, bearing in mind that you still need to build a retirement nest egg." They also urge members to set aside some OA funds for a rainy day.

Manulife (Singapore) financial planner Anne Tay said: "Some extra CPF savings should be kept as a buffer to pre-empt an increase in mortgage interest rates."

The spare OA funds parked away can also be used to pay off the home loan in the event of a sudden job loss or if you decide to take a break from paid employment.

You should also sign up for the Home Protection Scheme (HPS), which ensures that in times of death and permanent incapacity, the insured member's dependants will continue to have a roof over their heads.

"This is why it's important that members must ensure they have set aside enough funds in their OA to pay for the HPS premium," said Ms Soh Tse Min, CPF deputy director (home protection scheme).

3. To invest or not to invest?

You may be tempted to use your CPF money to invest in shares, unit trusts or other products. However, you should consider this carefully before proceeding, as the opportunity cost of using these funds to invest may be quite high. There are also transaction costs involved.

"Besides being risk-free, the CPF interest is guaranteed to be at least 2.5 per cent," said Mr Chang Long Kiat, CPF senior director (housing and investment).

This minimum guaranteed interest rate is particularly "reassuring" in the current low interest rate environment, he noted.

The Government also gives an extra 1 per cent interest for the first $60,000 of combined balances, with up to $20,000 from the OA, he added.

Financial experts such as Providend's Mr Tan advise against investing Special Account (SA) funds, as it currently pays at least 4 per cent interest yearly.

"Look at your SA like the safe part of your portfolio, your bonds, that gives you pretty decent returns that are risk-free," he said.

As for your OA, if you invest, you should be harvesting about 5 per cent to 6 per cent a year to make it worth your while, said Mr Tan.

He added: "Avoid using your OA money to speculate in shares for the short term."

A wiser option would be to use your spare cash in hand to invest instead of drawing on your CPF money, said Manulife's Ms Tay, as there will be a lower opportunity cost.

She noted: "This is especially so if your cash is sitting in the bank account earning low interest. You might as well make your money work harder for you."

Ms Tay advised those thinking of doing so to avoid timing the market and commit to a regular investment plan.

This will enable them to invest at all times whether the market is volatile or not.

You can also take advantage of the higher CPF interest rates by topping up your OA with spare cash, said Mr Vasu Menon, OCBC's vice-president of wealth management for Singapore.

He added: "If you have excess cash that you can set aside for the long term, it makes sense to top up your CPF OA as the returns from CPF savings exceed bank deposit rates currently."


Bank worker Jenny Tan was so focused on being debt-free that she paid off her mortgage before turning 35. Ms Tan, 44, and her husband, Mr Low Boon Hin, 45, used spare cash from their Central Provident Fund (CPF) Ordinary Accounts and walked free of their housing debt around 2003.

Ms Tan tells The Sunday Times: "I've a traditional Chinese way of thinking and do not like to owe people money. Besides, I feel stressed and burdened with debts around."

The couple had bought their five-room flat in Serangoon with a 25-year HDB loan of around $194,000 in 1995.

Paying it off in about seven years didn't require scrimping and sacrificing their spare cash as all the money came from their CPF funds.

It meant that Ms Tan, a deputy manager at a bank, was still able to afford overseas family holidays with her two children and even own a car.

"We never used our CPF money to invest - we did a lump sum payment twice with the money which was contributed to our CPF Ordinary Accounts," she adds.

While she admits that it would be harder to pay off a mortgage so quickly these days given pricier homes, she urges others to make repaying housing debt a key priority. She says: "We will certainly advise others to do the same, as the debt-free kind of feeling is great."

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